Wall Street under fire

Updated 11:09 pm, Tuesday, October 2, 2012

New York Attorney General Eric Schneiderman speaks during a news conference at the Justice Department in Washingotn, Tuesday, Oct. 2, 2012, in Washington. The federal government onTuesday threw its support behind a lawsuit against JPMorgan Chase accusing Bear Stearns, the investment bank JPMorgan bought in 2008, of engaging in massive fraud in deals involving billions in residential mortgage-backed securities. (AP Photo/Carolyn Kaster)

ALBANY — In the first major legal action from a federal task force charged with investigating the causes of the 2008 financial crash, state Attorney General Eric Schneiderman filed suit against Bear Stearns and its lending operation, EMC Mortgage Corp. — both now part of financial services giant J.P. Morgan Chase & Co.

The suit, filed late Monday in New York state Supreme Court, alleges that Bear Stearns knowingly marketed and sold deficient mortgage packages as if they were sturdy investments. The practice, according to the suit, was perpetuated by the firm's desire to maintain good relations with mortgage originators — often at the expense of Bear Stearns' investors.

The suit further claims the firm often settled with loan originators in situations where lenders would have been obligated to buy back mortgages after they were revealed to be deficient. Instead, Bear Stearns allegedly pocketed the settlements rather than pass them on to investors who had acquired the wobbly mortgage-backed securities.

The suit quotes internal communications in which Bear Stearns executives referred to individual securitizations in disparaging terms, from a "going out of business sale" to a "dog" and worse.

"The complaint goes to the heart of the misconduct that created the housing bubble and caused the crash of 2008," Schneiderman said in a conference call with reporters.

He said Bear Stearns' quality-control apparatus was "a sham" that frequently overruled underwriters who gave low scores to specific mortgage packages, and drove employees to process an overwhelming workflow.

Schneiderman said similar legal actions were likely in "the not-too-distant future."

A civil action comes with a six-year limit: "The statute of limitations is an issue that we expect to be in dispute in the litigation," Schneiderman said, noting courts have often extended the statute when defendants have conspired to conceal wrongful actions.

Schneiderman said the total amount of losses resulting from the company's alleged actions runs into the "tens of billions of dollars," although a clearer number would likely be revealed in the discovery process. The suit seeks reimbursement for investors as well as penalties.

J.P. Morgan purchased the collapsing Bear Stearns for $10 a share in the spring of 2008 in a deal underwritten by the federal government, which feared greater disruption of the financial markets if the firm simply closed up shop.

In a statement, J.P. Morgan said Schneiderman's action "relates to Bear Stearns, which we acquired over the course of a weekend at the behest of the U.S. government. This complaint is entirely about historic conduct by that entity."

That argument — that as far as J.P. Morgan goes, the suit was a case of "no good deed goes unpunished" — was picked up Tuesday on financial news networks.

Appearing on Fox Business, former U.S. Securities and Exchange Commission Chairman Harvey Pitt noted the suit alleged many of the same acts described in a previous action brought by the Ambac Assurance Corp., which insured a portion of Bear Stearns' mortgage-backed securities.

"There seems to be a lot of theater here," Pitt said, pointing out that the lawsuit had been filed in the thick of a presidential election that turns on economic issues.

"Prosecutors bring cases when the cases are ready," Schneiderman said in a later interview on Fox.